Accounting for Investments: Equity, Control, and Fair Value

Posted on Apr 6, 2025 in Economy

Accounting for Investments: An Overview

  • Provision for recovery (used to adjust the cost of the investment at market value).
  • Gain / Loss Unrealized holding gains, net (like the provision for recovery, reported as part of shareholders’ equity).
        • The entry to record the sale of securities available for sale, has two parts:
          • The cash account will be debited for the amount received, the investment account will be credited for the original investment value, and the difference will be debited Loss on Sale of Investment, or credited to Gain on Sale of Investments.
          • The Reserve has to adjust to market value and the related account Gain / Loss Unrealized holding will be reduced by the amount of unrealized gain or loss for the securities sold.
        • In terms of effect on the financial statements:
          • The gain or loss on sale of investments will be included in net income status.
          • Account unrealized gains or losses on the balance sheet appears in the section of shareholders’ equity.
    • Comparing Values ​​for Market and Securities Available for Sale.
      • The way to report the impact of gains / losses from holding depends on how we have classified the Investment View corresponding blade. This sheet is very important. (Selling Trading Securities).
      • Any gains / losses and any gain / loss on sale of investments to market, are included in net income status.
  • OBJECTIVE 3: Analyze and report investments that involve significant influence using the equity method.
    • Securities held to exercise significant influence. See the matching illustration.
      • The investor can exercise influence without owning all of the shares (that is, an investment between 20% and 50% of the outstanding shares entitled to vote.)
      • The equity method is used (instead of market value method) for the securities held by the company to exercise significant influence.
    • Classifying investments in associated companies. They are classified as investments in associates (or affiliates) and are presented as long-term investments in the Balance Sheet.
    • Registering investments under the equity method. See the matching illustration.


  • GOAL 4: Analyze and report investments in controlling interests in subsidiaries in consolidated financial statements.
    • Securities held to control.
      • Headquarters. The company that obtains a controlling influence on another company.
      • Subsidiary. The company acquired the parent company.
      • When a company acquires an interest in another in order to control, financial statements must be prepared. See the matching illustration.
      • Reasons to acquire control of another corporation:
        • Vertical integration
        • Horizontal growth
        • Synergy
        • Diversification
        • Special Assets
        • Opportunities
    • Methods to acquire a controlling interest.
      • A. Combined interests. Completed an acquisition that is changing the parent company shares into common stock with voting rights of the subsidiary. This type of acquisition must meet a very strict set of criteria. (It is seen in advanced accounting courses.)
      • Purchase. Completed an acquisition that is buying shares with voting rights of the subsidiary company and paying in cash.
    • The purchase method is the most frequently used in business combinations.
      • Net assets (assets minus liabilities) of the subsidiary are recorded at fair market value.
      • The difference between the purchase price of the subsidiary and the fair market value of net assets acquired is called Goodwill (Goodwill).
        • The capital gain is reported only in a balance sheet when purchased.
        • The Goodwill must be amortized. (See Chapter VIII).
      • Consolidated Financial Statements.
        • Consolidated Balance Sheet. View corresponding blade)
        • Consolidated Income Statement. See the matching illustration.